Fiscal Folly

The economy is still very fragile, yet Washington seems more fixated on deficits than on recovery. Fiscal conservatives in Congress hope to hold recovery spending hostage for long-term caps on social outlay, and they have some company in the White House. Groups like the billion-dollar Peter G. Peterson Foundation are leading the charge.

For a quarter-century, Peterson has been exaggerating long-term costs of Social Security and Medicare. In truth, Social Security is close to balance -- its 75-year projected deficit is just one-half of 1 percent of gross domestic product. Medicare is seriously in deficit, but reform of Medicare consistent with high-quality health care depends on tackling the deeper drivers of medical inflation.

But for those inclined to cut social insurance, the recession--driven deficit is a godsend because it lends credence both to the alarmism and to extreme remedies. Sen. Kent Conrad, a Democrat from North Dakota, and Sen. Judd Gregg, a Republican from New Hampshire, are promoting a fast-track commission with extraordinary powers to cap federal spending, a long-standing Peterson project. The commission would make recommendations that Congress must vote up or down with little debate or opportunity to amend.

The flaws in this idea are both procedural and substantive. The Constitution vests the power of the purse in a democratically elected Congress, not in an elite body insulated from public deliberation and debate. Substantively, the commission's sponsors want it to recommend the sort of cuts in Social Security and Medicare that would never be approved through the normal legislative process. Some say new taxes could be on the table, but the commission's Republican backers insist tax increases would be dead on arrival. So the lowest common denominator would be deep cuts in social insurance.

Given the opposition of key House and Senate leaders, Conrad-Gregg may not get through Congress. But the Obama administration, looking for "cover" to offset short-term spending increases, now supports some version of the idea. This is a huge mistake; it reinforces the misplaced obsession with deficits as well as the self--fulfilling prophesy that such a commission is both desirable and inevitable.

In December, the House, by a slender margin of 218 to 214, passed a $154 billion bill for state fiscal relief, emergency job creation, and extended unemployment and health benefits. The administration did not lift a finger in support of this bill and seems wrongly convinced that the deficit is the bigger issue. But public concern about deficits is really a proxy for broader unease that government is not delivering enough practical help.

According to The New York Times, 37 percent of the 2009-2012 deficit stems from the recession itself, because of revenue losses and increased automatic relief outlays. Another 33 percent reflects Bush-era tax cuts and Bush programs like the Medicare drug benefit (with its generous subsidy for drug companies). The military build up added 20 percent more. Only 7 percent came from the Obama stimulus; all other new domestic spending adds just 3 percent. The president should be helping citizens sort this out, not caving in to the fear-mongers.

Long-term fiscal balance is necessary policy, but we can reduce the debt burden without slashing social outlay. That's exactly what we did during the quarter--century boom after World War II, when we combined high growth rates, modest budget deficits, progressive taxation, a declining debt burden -- and increases in social spending. That growth was partly driven by public investment.

The current argument about deficits and debts conflates several entirely distinct issues. Do we need bigger economic stimulus now to promote a faster recovery? (Yes.) Should we reduce deficits and the ratio of debt to GDP once a strong recovery comes? (Yes.) Does this require an extra-legislative commission? (No.) Do we need to slash social insurance in order to achieve fiscal balance? (No.) Are there other ways to get to a sustainable budget? (Most definitely.)

Despite the alarmism, the Congressional Budget Office projects that deficits will stabilize at about 3.2 percent of GDP after 2014 and that the public debt will plateau below 70 percent of GDP. That's well below the debt ratio during the boom years after World War II. Cut the average deficit to 2 percent, and the debt ratio comes steadily down. With progressive taxes, we can have our fiscal balance and our social spending, too.

More investment in children, workers, and public infrastructure can increase productivity, growth, and fairness. As a nation, we can afford those outlays without shortchanging the elderly. That's a much better road to recovery than using an extra-democratic commission to shackle social outlay that the county needs.